Interest Rate vs APR Calculator

Interest Rate vs APR Calculator

Are you looking for a loan or simply trying to understand your options? Do you find it confusing how some lenders use APR and others use interest rate? What's the difference and how can I compare loans from different providers? This calculator will show you the interest rate and APR for any loan, helping you understand these key terms, as well as compare the different options available to you.

The interest rate, typically expressed as an annual percentage, determines how much it will cost you to pay back the loan. If you pay back the loan early, you will pay less interest. APR (Annual Percentage Rate) is a more complete measure of the true cost of a loan, as it incorporates all additional fees and charges. The most common example is an origination fee that is usually deducted automatically from the funds prior to receipt. For example, a 5 year loan of $10,000 with a 10% interest rate and 5% origination fee will have an APR of 12.24%, with the $500 origination fee meaning you will only receive $9,500.

Assumptions & Limitations

This calculator is useful for most types of loans that are typically offered by banks and lenders. It is specifically designed for loans that are repaid in a fixed number of equal monthly payments, which applies to most personal loans, auto loans and mortgages. However, some loans are repaid on weekly or bi-weekly schedules, while you may encounter loans that require a large lump sum to be repaid at the end of the loan period. This calculator is not appropriate for these types of loans. Similarly, this calculator assumes that interest is compounded monthly, which is the norm for most consumer loans in the United States. The calculations will be inaccurate if the compounding period is not monthly- for example, many payday loans compound daily or weekly, which increases the total interest you pay on those loans. Some types of credit have variable interest rates, where the interest rate changes as you repay the debt (e.g. credit cards). This calculator assumes that the interest is fixed at the start of loan, which is typical for most loans.

Calculator Inputs

Whether it's a personal loan or a mortgage, a loan is made up of three key ingredients:

• Loan Amount: Also known as the principal, this is the amount of money that you agree to borrow from the lender. This figure could be anywhere from $500 for a small personal loan to tens of millions of dollars for extravagent mortgages.
• Interest Rate:This is the percentage of the loan amount that you will pay as interest to the lender. It is usually an annual rate. Higher interest rates will increase the monthly payment amount, as well as the total cost of the loan. It's important to understand the difference between interest rate and APR, where the latter also incorporates fees (see origination fee below).
• Repayment Period: Also known as the loan term, this is the total time period over which you will repay the loan. The calculator allows it to be specified in years or months (e.g. 66 months or 5.5 years). A small personal loan might have durations as low as 3 months, while mortgages might be repaid over 30 or 40 years.

To calculate your monthly payments, these fields must be filled. The Origination Fee field is optional.

• Origination Fee: Sometimes called an administration fee, this is a chargeimposed by some lenders to cover the cost of providing and processing a loan. The borrower doesn't directly pay the origination fee, but instead the fee is automatically deducted from the loan proceeds. It is usually expressed as a percetange of the total amount borrowed, though you sometimes see it quoted as a fixed amount. The calculator allows you to choose between these two options.

Interest Rate vs APR

Once you've submitted the loan information, the summary box will display the interest rate and the APR.

• Interest Rate: The interest rate determines how much additional money you must spend in the process of paying the loan. The interest you pay is proportionate to the outstanding balance (i.e. the amount you still owe). This means that loans with longer durations will carry greater interest.
• APR: APR is a broader measure of the cost of repaying debt, as it includes unavoidable charges and fees, on top of the interest rate. This means that the APR will never be less than the interest rate. If there are no additional fees and charges, then the interest rate and APR are equivalent. Many loans carry unavoidable expenses like origination fees. The size of these fees determines the difference between the interest rate and the APR.